Inflation Edges Down in September, in Line With Estimates

Inflation, as measured by an index closely followed by the Federal Reserve, dipped slightly in line with estimates in September, the Bureau of Economic Analysis reported on Friday.

The personal consumption price expenditures index rose 0.4% for the month, unchanged from August, while rising 3.4% on an annual basis, down from 3.5% a month earlier.

The narrower core index, excluding food and energy costs, rose 0.3% for the month, in line with expectations but up from the 0.1% increase in August. For the year, the core index is running at 3.7%, an improvement from the 3.9% registered a month ago.

The report showed that spending also increased, by 0.7%, while incomes rose by 0.3%,

“Core Inflation: the three month annualized pace of core PCE slowed to 2.4% y/y. Food inflation at 2% using that same metric. Core PCE is the best predictor of long run inflation and the direction in this metric is quite encouraging,” RSM US Chief Economist Joseph Brusuelas posted on social media.

The PCE is the last major piece of economic data to be released before the Fed meets next week to consider monetary policy. It is widely expected that the central bank will hold rates steady as it watches the market do its work for it with bond yields that have risen to more than 5% for both short-term and longer-duration Treasurys.

On Thursday, the government said gross domestic product rose at an annual rate of 4.9% in the third quarter, more than twice that of the 2.1% gain in the second quarter and driven by strong consumer and government spending.

“While strength was evident across the board, the report adds to concerns that the economy’s resilience will pull interest rates even higher and cause rates to remain higher for longer,” Piedmont Crescent Capital Chief Economist Mark Vitner said on Thursday. “Higher interest rates will add to the growing litany of concerns ranging from the resumption of student loan payments, tightening financial conditions, fights over persistent budget deficits, and ongoing wars in Europe and the Middle East.”

Most economists are looking for the economy to slow in the coming months, but that was also the forecast at the start of 2023. And that proved wrong.

“Sources of upside risk remain in the medium to near term,” Vanguard Chief Global Economist Joe Davis and Senior Economist Andrew Patterson said on Thursday. “Data in the past few weeks has been mixed while Q3 growth came in well above projections which had already anticipated a strong quarter. Robust demand, should it persist, could keep an upward pressure on inflation as we head further into Q4.”

The pair forecast inflation to gradually slow as the year comes to an end, with core PCE staying “well above 3% by year-end 2023 and slightly above 2% by year end 2024.”

One key factor will be the strength of the labor market. Job gains in September came in nearly double the expected forecast, at 336,000. The government will report the number of new jobs added in October next Friday.